Investment Highlights

• We maintain BUY call on CTOS Digital Holdings (CTOS) with an unchanged SOP-based fair value (FV) of RM1.80/share, which implies FY25F PE of 27x - 18% discount to the 5-year average of 33x. Our FV also incorporates a 3% premium to our unchanged 4-star ESG rating.

• We attended an analyst briefing yesterday regarding the decision of the High Court on the litigation case against its wholly-owned CTOS Data Systems.

• Key takeaways are as follows:
  
  ✓ CTOS has lodged an appeal on ruling of the High Court judge which has awarded damages of RM200k to the plaintiff, Suriati Binti Mohd Yusof. It is likely to take 3-6 months for the case to be heard in the Court of Appeal.
  
  ✓ CTOS is confident of winning the case based on the following: (i) all procedures in giving out the credit scoring report to customers were audited in accordance to the Credit Reporting Agencies (CRA) Act with the group following the necessary protocols, and (ii) the group is able to prove that the plaintiff’s debt to a telecommunication company was valid, thus ruling out claims on the inaccuracy of the credit report.
  
  ✓ CTOS emphasised that all operations and businesses will continue as usual, and the outcome of the recent litigation case does not stop the company from offering credit scoring products to customers. CTOS alluded that regulators (MoF and BNM) have agreed that credit scoring will be part and parcel of the credit reporting business.
  
  ✓ CTOS has won all 12 defamation cases in the past since 2014, and currently there are another 5 ongoing similar cases. CTOS believe that the company has a high chance in winning the case based on proven cases won by them in the past.
  
  ✓ CTOS also believes that the case will not impact the relationship and trust of their customers as they have complied to the ruling and procedures with a proven track record of success in previous legal cases.
  
  ✓ CTOS guided that there will not be any impact to earnings as no provisions will be made given the appeal against the case. We understand that there will not be any additional cost to be incurred from this lawsuit case on the group.

• We are neutral on the litigation case as CTOS has strong grounds for appeal backed by: (i) business as usual, (ii) no earnings impact to the key accounts which make up 43% of total FY23 revenue, and (iii) high chances in winning the case on sufficient evidence. Recall, direct consumer segment accounted for 9% of total FY23 revenue and credit scoring product makes up 13%-15% of FY23 revenue.

• The stock is trading undemanding at FY24F PE of 23x, below its 5-year average of 33x.

Source: AmInvest Research - 13 Mar 2024